As blockchain turns the corner on its tenth anniversary, the future of this and other distributed ledger technologies looks bright. Most commonly associated with the crypto-currency Bitcoin, blockchains are increasingly being explored for myriad uses in healthcare, supply chains, and logistics, and, particularly, finance.

"Blockchain has been the No. 1 search term on gartner.com since January 2017," writes Gartner's Kasey Panetta.

While blockchain is the most widely recognizable distributed ledger technology (DLT), it is just one of many available to companies and marketplaces that could benefit from a decentralized, secure, and immutable database of record. How they work is beyond the scope of this article but, suffice to say, that having access to a verified, unalterable, mutually-agreed-upon, single-version-of-the-truth is proving to be a really good idea.

"The ability to share verified and trusted data within an organization, or with an external network in real time, opens up opportunities for wholesale changes to business processes and business models," writes Margaret Harrist, director of Content Strategy and Implementation at Oracle, in the Wall Street Journal. "Among the many potential blockchain applications are farm-to-table food tracking, real-time contractor licensing, real estate transfers and all types of financial transactions."

Of these four areas, the sector most interested in DLTs is financial services. According to PwC, 46 percent of its 2018 Global Blockchain survey respondents said financial services was the "most advanced in developing blockchain today." Its nearest competitors, at just 12 percent, were energy/utilities and healthcare.

According to research firm IDC, spending on blockchain is set to skyrocket. They predict a five-year compound annual growth rate (CAGR) of 73 percent between now and 2022 with the financial services sector in the US leading the way in overall dollars spent.

Accounting firm KPMG is even more bullish. They predict in their 2018 Blockchain and the Future of Finance report that, by 2021, a quarter of Global 2000 companies will be using blockchain "as a foundation for digital trust at scale" and that the business value added by DLT technologies "will surpass $176 billion by 2025 and $3.1 trillion by 2030."

This is because DLTs are uniquely suited to help financial institutions lower costs and improve efficiencies. DLTs do this by cutting out middlemen and allowing all parties of a transaction to access trusted records directly. This eliminates the need for information clearinghouses. The other thing that cuts transaction times is the idea of "smart contracts," which is a self-executing policy that is triggered by a previously agreed upon events.

"For example, a smart contract could trigger an automatic refund under certain conditions or the automatic payment of an agreed commission after a sale," states KPMG. "These smart contracts can eliminate delays in traditional finance processes while increasing transparency and reducing reliance on middlemen to follow through on their commitments. Moreover, like other parts of a blockchain, smart contracts are immutable, so they can enhance accuracy in the financial statements."

Corporate finance will benefit as well

The implications for corporate finance are many. According to KPMG, these two technologies working in tandem enhances transparency, easing the risks around Know-Your-Customer regulations. This one advancement could save financial institutions and their customers anywhere from $60M to $500M per year, per company in compliance costs and customer due diligence, according to a 2016 Thompson Reuters survey.

"Both financial firms and their corporate customers agreed that lengthening KYC procedures are putting more strain on on-boarding processes and client relationships …," the report states.

Other potential benefits listed in the KPMG report include:

  • Up to a 95 percent reduction in errors caused by out-of-sync ledgers;
  • Up to a 40 percent increase in efficiency brought about by straight-through processing and a single-version-of-the-truth;
  • Up to 25 percent improvement in customer experience; and
  • Up to 75 percent reduction in capital consumption from faster trade settlements, straight-through processing, and more available capital.

With most companies are only engaging in small-scale proof-of-concept studies to understand how they can integrate DLTs into their workflows, it remains to be seen what the impact will be. But it is predicted by many to be significant.

In an article published on the ACCA's website, Peter McBurney, a computer science professor at King’s College London, writes that "[m]uch of the buzz around blockchain arises from its ramifications. The creation of an online presence by ‘bricks-and-mortar’ companies in the mid-1990s resulted in companies redesigning their internal business processes, and there followed a decade of business process engineering (BPE) and re-engineering (BPR) projects. The adoption of distributed ledger technologies for multicompany workflows will, I expect, lead to another wave of BPE/BPR projects."

The most likely short-term scenario is, somewhat ironically for a technology that is designed to disintermediate existing business processes, companies will use the technology to replace centralized, proprietary databases while keeping all of the business logic and processes of their existing ERP infrastructures intact, said KPMG.

"Despite the benefits of blockchain, it will not replace traditional ERP systems overnight. Rather, distributed ledgers initially will supplement the systems of record, specifically in cases where balances are frequently recalculated as transactions occur."

There are headwinds, however. One of the biggest (again, somewhat ironically) is trust. DLTs technology, while not new, is new enough that regulators and business people don't yet understand it. Nor are there codified structures in place to handle disputes and problems when they arise. Interoperability standards need to be hashed out as well since not all blockchain use the same underlying technology or the same mechanisms to verify transactions are authentic.

"As with any emerging technology, there are challenges and doubts about blockchain’s reliability, speed, security, and scalability," write Steve Davies and Grainne McNamara for PwC. "Such doubts are only compounded by concerns regarding a lack of standardization and interoperability across blockchain systems. Moreover, many executives remain uncertain about what blockchain is and how it will change their business."

Even so, the long-term outlook is bullish. Changes to the status-quo are expected to be significant and impact every sector of business, governments, and people's daily lives -- much as ICT technologies have done over the past 20 years.

At risk of being overly dramatic, the authors of a report for the UK Government Office for Science write: "The progress of mankind is marked by the rise of new technologies and the human ingenuity they unlock. In distributed ledger technology, we may be witnessing one of those potential explosions of creative potential that catalyse exceptional levels of innovation."

 

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